12/27/2015

How Ethan Allen beat the hedge fund activists and how much it cost

Here's a great essay on how Ethan Allen stood up to the hedge fund activists. It will probably become a leading case study.

What struck me was the way hedge fund activists tried to undermine Ethan Allen in their effort to impose their own model on the company and all its other investors:

In our case, it was primarily the activist investor and Institutional Shareholder Services, and those shareholders who outsource their proxy governance voting to them, who supported financial engineering to fund large share buybacks and so fuel short-term financial returns.

While we were talking to our shareholders, the activist hedge fund pressure on Ethan Allen and its people was coordinated, personal, local and immense. For our CEO and CFO, in a very flat management operating company structure, responding to the hedge fund activist diverted more management time and resources than our prior initial public offering or managing through the early years of the great recession. The activist publicity campaign against Ethan Allen was intended to create business uncertainty and inevitably created questions from our key business relationships and associates in considering whether to continue making long-term commitments to our company. These typical activist tactics risk our Ethan Allen business and so our shareholder values. It’s very difficult to see how this disruption improves Ethan Allen now or in the long term for the benefit of our shareholders. Some of our investors acknowledged the typical immense Wall Street advisor costs and how they might be isolated and reported as an unusual expense, and more generally acknowledged to us, that it’s not worth it in the long term, you should exit the U.S. public stock markets, just as almost half of U.S. public companies have done so in the recent decade.

This is a significant source of costs that you never hear hedge fund academic apologists acknowledging. It's why I believe limits on shareholder power have become essential.

Comments

Here's a great essay on how Ethan Allen stood up to the hedge fund activists. It will probably become a leading case study.

What struck me was the way hedge fund activists tried to undermine Ethan Allen in their effort to impose their own model on the company and all its other investors:

In our case, it was primarily the activist investor and Institutional Shareholder Services, and those shareholders who outsource their proxy governance voting to them, who supported financial engineering to fund large share buybacks and so fuel short-term financial returns.

While we were talking to our shareholders, the activist hedge fund pressure on Ethan Allen and its people was coordinated, personal, local and immense. For our CEO and CFO, in a very flat management operating company structure, responding to the hedge fund activist diverted more management time and resources than our prior initial public offering or managing through the early years of the great recession. The activist publicity campaign against Ethan Allen was intended to create business uncertainty and inevitably created questions from our key business relationships and associates in considering whether to continue making long-term commitments to our company. These typical activist tactics risk our Ethan Allen business and so our shareholder values. It’s very difficult to see how this disruption improves Ethan Allen now or in the long term for the benefit of our shareholders. Some of our investors acknowledged the typical immense Wall Street advisor costs and how they might be isolated and reported as an unusual expense, and more generally acknowledged to us, that it’s not worth it in the long term, you should exit the U.S. public stock markets, just as almost half of U.S. public companies have done so in the recent decade.

This is a significant source of costs that you never hear hedge fund academic apologists acknowledging. It's why I believe limits on shareholder power have become essential.